Peninsula Airport Commission board members' and executives' lack of concern about People Express Airlines' several failed promises about finances and their failure to check state law led to the unauthorized use of taxpayer funds to pay off the failed start-up's debt, state auditors said Friday.

The auditors called for Newport News/Williamsburg International Airport to reimburse the state the $4.5 million it spent.

The auditors blasted the commission's lack of transparency about the deal, and reported that they had received two separate reports that former airport Executive Director Ken Spirito had shredded and destroyed documents after they asked for records about the payment. They also received a report that he removed documents from the airport. Spirito was fired last month for using several thousand dollars of airport funds for his personal expenses. He could not be reached for comment on Friday.

The auditors' blistering 300-plus page report details years of promises that never came true that People Express, founded by a man just four years out of bankruptcy, was raising tens of millions of dollars to launch an airline based in Newport News that would employ 1,000 people. The Norfolk airport and state economic development officials had dismissed those promises as unlikely shortly before People Express founder Mike Morisi made his pitch to Spirito.

Secretary of Transportation Aubrey Layne, who asked for the audit after the Daily Press reported the commission's repayment of the People Express debt to TowneBank, said he would be give the auditors' recommendation a heavy weighting when deciding over the next few weeks what he could require the airport do.

He said one option is to press the commission to recoup the money, in which case it would be available for Newport News/Williamsburg for appropriate purposes.

"We're saying the state's behind them," Layne said. "I don't think that just because these guys screwed up, the public should be hurt ... I don't want to hurt the flying public."

But if the commission can't recoup the money, Layne said, another option would be to withhold future payments to the airport. "We'd be reimbursed that way ... otherwise, it's not fair to the rest of the state."

Separately, Attorney General Mark Herring issued a formal opinion Friday that the loan guarantee the airport made, which forced the payment to TowneBank when People Express defaulted, violated the state constitution. The constitution bans local governments and agencies like the airport commission from pledging their credit to a private entity.

In addition to finding that the loan repayment was not authorized by state law, the VDOT auditors also reported that former Newport News City Manager Jim Bourey and Councilman Bert Bateman, both members of the commission at the time, were involved in discussions to arrange the commission-guaranteed loan.

Bourey did not respond to a request for comment, saying in a text message he had not seen the report. Bateman said he properly recused himself from commission deliberations about the loan. Spirito could not be reached immediately for comment, although a man who answered his cellphone and identified himself as Spirito's brother said he would pass on a message.

Bourey resigned from the commission in March, shortly before the commission put Spirito on paid leave from his $223,000-a-year job and said it would provide records the auditors complained they had not received, despite a month of repeated requests. Bourey resigned as city manager a few days later.

The auditors also reported that:

•The commission and its staff did not take the basic care required to check out a major financial transaction before agreeing to guarantee a $5 million line-of-credit loan from TowneBank to People Express.

•Commission staff and Bourey were aware of more than $250,000 in tax liens owed by People Express and more than $40,000 owed the airport itself before deciding to guarantee the loan.

•Nine days before the closed-door meeting at which Bourey and two other commissioners decided to go ahead and guarantee the loan, Bourey received a financial statement from People Express showing that its debts already exceeded its assets by more than $240,000.

•Spirito did not always provide complete information to the airport's board of commissioners.

•The commission's dealings with TowneBank were rife with real or perceived conflicts of interest — besides Bateman, former airport lawyer Herbert V. Kelly Jr. was a member of TowneBank's Peninsula board and W.M. Jordan CEO John Lawson, a major investor in TowneBank and a bank director, was also a contractor with the airport who had invested in and lent money to People Express.

•The commission and its staff were unaware for nearly a month and a half that People Express had revised its agreement with Vision Air, the Nevada firm it said it was hiring to operate a three-plane fleet; under the new agreement, People Express was merely acting as Vision Air's general sales agency.

"This is particularly concerning given the loan was to PEX (People Express) who was merely a marketing company attempting to market flights," the auditors said, noting that the basic reason given for the loan was to pay Vision Air for the use of its planes.

Federal aviation records showed that Vision Air's debts exceeded its assets by $30 million at the time. When asked about this shortly after the People Express service collapsed, Spirito said that was not a big deal and was typical of many aviation companies.

The auditors also said commission and staff actively misled the public and news media.

At one point shortly before People Express stopped flying, the auditors noted, Newport News Economic Development Director Florence Kingston emailed Bourey to say a Norfolk reporter had asked about incentives granted to People Express.

"So she did not ask about the loan info, and, of course, you did not volunteer it," Bourey emailed back.

"Heck no and no," Kingston replied.

The auditors reported that the commission was not candid with TowneBank about People Express' struggles.

And after tracing through a series of transfers between various airport bank accounts, the auditors said the commission's statements in its own financial reports and to the Federal Aviation Administration about the public money it used were incorrect.

The commission improperly used $3.5 million of state funds to pay off the People Express debt — $50,000 from a regional committee funded by Peninsula localities to support air service and more than $940,000 from two other accounts that the auditors said might not be in compliance with FAA regulations.

The commission had said it used $700,000 from the regional committee, a move that prompted Hampton, James City County and York County to freeze payments to the committee.

Although Herring's opinion, released shortly after the VDOT audit on Friday, reported a long series of court decisions showing that it violated the state constitution for an agency like the airport commission to guarantee a loan for a private entity for a private purpose, and that the People Express financing was for a private purpose, the auditors noted that commission lawyer and TowneBank board member Kelly had formally advised the commission that he had checked and it was legal.

The auditors' report noted that while airport executives had asked on four prior occasions whether state funds could be used for specific projects, they avoided doing so about the People Express loan.

How effectively the state could demand repayment remains a question. An Office of the State Inspector General review released in May said the Virginia Department of Aviation "lacks the internal authority to require the funds to be reimbursed to the state."

Layne said Friday this is "absolutely" an issue, and that the best thing would be for the commission and state to work together on a resolution. He said the repaid money would likely end up with commission anyway, for use at the airport.

"We'll take the next two weeks and work with the commission about how we go forward," he said. "If they won't (cooperate), maybe there are other actions we have to take."

The state could withhold future funding to force repayment, but until a change in state law — made this year as a result of this case — takes effect July 1, that power is also in question.

The state is able to deny discretionary funding, but entitlement funding is the bigger pot of money. Layne cut off those funds while the audit was underway, and he did so after consulting with the governor and the legislature's money committees. But he acknowledged the legal gray area.

With the audit done, Layne said, the state wants to work with the commission toward turning that funding stream back on.

"At the end of the day we don't want to hurt the traveling or flying public in Newport News," Layne said. "I am hoping that we find a willing partner in the airport commission."

Daily Press reporters Reema Amin and Travis Fain contributed to this report. Ress can be reached by phone at 757-247-4535.